SRI LANKA

Democratic Socialist Republic of Sri Lanka

Sri Lanka Prajathanthrika Samajavadi

Janarajaya

COUNTRY OVERVIEW

LOCATION AND SIZE.

Sri Lanka is an island nation-state in the Indian Ocean. It is located
880 kilometers (547 miles) north of the equator, off the southern tip of
India, and has a maximum length of 432 kilometers (268 miles) and a
maximum width of 224 kilometers (139 miles). The island has an area of
65,610 square kilometers (25,332 square miles) and a total coastline of
1,700 kilometers (1,056 miles). Sri Lanka is slightly larger than West
Virginia. Its capital, Colombo, lies on the country's western
coast.

POPULATION.

Sri Lanka's population was estimated at 19.24 million in 2000,
indicating growth of 11.5 percent compared with the 1991 population of
17.25 million. Sri Lanka has the slowest-growing population in southern
Asia—estimated at 0.9 percent yearly—and its population is
projected to increase to 23.55 million by the year 2025. The density of
Sri Lanka's population is fairly high, at 280 persons per square
kilometer (725 per square mile). In 2000 the birth rate was estimated at
16.8 per 1,000 people and the death rate at 6.4 per 1,000 people. The
majority of Sri Lanka's people live in the rural sector (67
percent), in urban areas (22 percent), and on plantation estates (11
percent). The infant mortality rate (16.5 per 1,000) and overall death
rate are low for a developing country, and the average life expectancy
(69 years for men and 73 years for women) is the highest in southern
Asia. The low fertility rate and high life expectancy has led to a
larger increase in the older population than the younger population. It
took most western countries 45 to 135 years for their elderly population
to double, while in Sri Lanka this process is expected to take only 2
decades. Sri Lanka is expected to have the third oldest population in
Asia in 2025. The rising burden of maintaining an aged population could
exert considerable restraints on the government's fiscal
resources, and the need to provide retirement support income and health
care will have serious consequences on the economy as a whole during the
next 2 decades.

An important characteristic of the Sri Lankan population is its ethnic
and cultural diversity. Approximately 74 percent of the population are
Sinhalese, 12.6 percent are Sri Lankan Tamils, 5.5 percent Indian
Tamils, 5 percent Muslims, and the remainder consists of Burghers,
Malays, and others (2.9 percent). Among the ethnic groups, the Sinhalese
were the earliest inhabitants of Sri Lanka and are descendants of the
first colonists who occupied the island during the 5th century B.C. Most
of them are Buddhist, and speak a language called Sinhala, derived from
several Indo-Aryan languages. The Sri Lankan Tamils are the descendants
of the early Dravidian invaders from southern India. They are
predominantly Hindu and speak Tamil, one of the major Dravidian
languages of southern India. Indian Tamils are the descendants of
laborers brought by the British planters in the 19th century to work on
plantations. The Muslims are the descendants of early Arab traders who
settled in SriLanka

during the 10th century. The Burghers are the descendants of the
Portuguese, Dutch, and British who occupied the island from the 16th to
the mid-20th century. The Burghers are predominantly Christian and speak
English as their first language.

TAXATION AND REVENUE.

The major source of government revenue in Sri Lanka is taxes (86
percent). However, unlike the United States, the contribution of
income taxes
to government revenue is negligible, at 13 percent, while
indirect taxes
dominate government revenue. There are 3 major sources of indirect
taxes: the goods and services tax (GST),
excise tax
, and the national security
levy
(NSL). The GST is a recent addition to the tax system (introduced in
April 1998), replacing the business
turnover
tax. The GST is levied on a
value-added
basis at a uniform rate of 12.5 percent with full credit given to all
inputs. GST revenue accounted for 26 percent of the total tax revenues
in 2000. An excise tax, which contributed 23 percent of the total tax
revenue during the same period, is levied mainly on liquor, tobacco,
petroleum, and motor vehicles. The third important source of government
revenue, the NSL, was initially introduced as an interim measure to
finance the rising cost of war in the north and the east. It has become
an important contributor to national tax revenue, contributing 17.5
percent. The NSL is levied at a rate of 6.5 percent. Taxes on
international trade account for 16 percent of the total tax revenue.
With the liberalization of trade and
restructuring
of the tariff
regime, which began in the late 1980s, revenue from taxes on foreign
trade has been declining.

The personal income tax (PIT) rate in Sri Lanka has 4 brackets, ranging
from 10 percent to 35 percent. The PIT's contribution to the
government tax revenue is small (about 1 percent of gross domestic
product) and is lower than most other countries. The economy's
high dependence on subsistence agriculture, low levels of income and tax
compliance, and inefficient tax administration are the key contributors
to low levels of PIT revenue. The corporate income tax (CIT) in Sri
Lanka of 35 percent (flat rate) is relatively modest and is similar to
the rates in other Asian economies. However, the CIT tax yield in Sri
Lanka is quite low, as many firms are offered tax incentives to
encourage investment.

INDUSTRY

INDUSTRY.

Manufacturing accounts for 16 percent of the gross domestic product and
employs nearly 400,000 people. The textile industry is the largest of
Sri Lanka's industries, contributing 63 percent to industrial
sector growth (1999). Other major manufacturing industries include
processed diamonds, food and beverages, light engineering, chemicals,
petroleum, rubber and plastics, and machinery and equipment. The
manufacturing sector that evolved under the import substitution
development strategy in the 1960s to cater mainly to the domestic market
has transformed into a sector catering to the foreign market. Much of
the industrial output is exported and it is the single major export
earner in the economy (in 1999, industrial exports accounted for 54
percent of total export earnings). This remarkable achievement is
attributable to the policy reforms introduced during the post-1977
period. Under the reforms, the private sector was encouraged to
participate in export-oriented industries through various incentives,
and several free zones were established. This resulted in a significant
inflow of foreign investment; the private sector emerged as the major
contributor to industrial output. Overall, market-oriented policy
reforms introduced during the post-1977 period have led to far-reaching
changes in the structure and performance of the manufacturing sector.

MINING.

Mining is a minor economic activity contributing about 2 percent of the
gross domestic product (1999). The country's mineral extraction
industries include the mining of gemstones and graphite; excavation of
beach sands containing ilmenite and monazite; and quarrying quartz sand,
clay, and salt. Gem mining is traditionally the most important activity,
producing high value gem-stones such as sapphire, ruby, and topaz, and a
variety of semiprecious stones, most of which are exported. Sri Lanka
leads the world in high-grade graphite mining.

SERVICES

TRADE.

Wholesale and retail trade, the largest sub-category in the service
sector, accounts for about 21 percent of the gross domestic product
(1999) and employs about 22 percent of the workforce (2000). With the
lifting
of import controls and the government monopoly in the importation and
distribution of essential consumer goods during the post-1977 period,
the trade sector expanded rapidly. Domestic trade accounts for half the
value of the trade sector. Increased participation by foreign firms in
domestic trade in Sri Lanka is a relatively recent phenomenon, with
international food franchises such as McDonald's and Pizza Hut in
operation. Numerous small outlets including street stalls serve the
retail trade, and in the major cities there are large shopping centers
and supermarkets.

FINANCIAL SERVICES.

Banking, insurance, and real estate accounted for 8 percent of gross
domestic product in 2000. This sector expanded rapidly following the
1977 policy reforms that dismantled the virtual government monopoly in
the insurance industry and lifted the restrictions in the banking
industry. The increased incentives for the private sector led to the
emergence of several new insurance companies and banks. A total of 6 new
local banks were established and 11 foreign banks opened branches. The
banking system consists of 11 local and 16 foreign banks. Two
development finance institutions and several merchant and investment
banks are also active participants in the financial markets in Sri
Lanka. In addition, 22 financial institutions providing credit
facilities are in operation. The Sri Lankan financial system comes under
the regulation of the Central Bank of Sri Lanka, which is the monetary
authority of the country.

TOURISM.

Tourism is an important activity with potential for growth. The country
known as the paradise in the Indian Ocean offers a diversity of
environments and tourist attractions, from tropical beaches and arid
lands to lush forests, tea plantations, and a rich archaeological
heritage. Promotion of tourism in Sri Lanka began in the late 1960s with
the establishment of the Ceylon Tourist Board. Between 1976 and 1982,
the number of tourist arrivals grew rapidly at an annual average rate of
almost 24 percent, reaching a peak of 407,230 before declining to
337,342 in 1983 as a result of the civil unrest in the country. As the
political violence in the country intensified, international tourist
arrivals continued to fluctuate with a general trend of decline. Tourist
arrivals increased to 436,440 in 1999. Tourism generates US$275 million
in foreign exchange annually and employs approximately 87,600 workers.
The majority of tourists to Sri Lanka come from Western Europe (65
percent), Asia (26 percent), and North America (5 percent).